Posted
by
timothyon Thursday May 01, 2014 @01:39PM
from the be-the-change-you-want-to-see-in-the-world dept.

Bennett Haselton writes: "It's not trivial to explain why cell phone companies find it profitable to sell phones at a deep up-front discount and make it back over a two-year contract.
Why don't other companies sell similarly-priced goods the same way? (And why, for that matter, has T-Mobile found it more profitable to do the opposite, selling the phone and the service separately?) I'm trying to come up with an explanation that
makes realistic and consistent assumptions about the stupidity of the
buying public, and still makes sense." Read on for the rest of Bennett's thoughts.

Matthew Yglesias at Slate
wrote
a year and a half ago about T-Mobile up-ending the cell phone industry by starting to sell phones and
phone service separately. Yglesias wrote about the prevailing cell phone business model up to that point:

The customer walks out thrilled with the deal he got on his phone. Only later, when his ridiculous,
complicated, and obscenely high bill comes, does he realize he has been fleeced.
[...]
The subsidy model is basically a scam, but it only arose thanks to our own collective mental failings.
A phone-buying public used to getting high-end devices for $200 or $300 may simply balk at the discovery
that a pocket-sized computer’s actual price is twice that or more. Until now, limited competition in the
industry has let us optimistically believe that the American phone-buying public is the victim of
unscrupulous business practices. But if T-Mobile can’t make this work, the lesson will be that the
real fault lies with ourselves.

I always thought the underlying question was more complicated than that. First of all, if customers really realized
that they had been "fleeced" after the first of their 24 monthly bills came in, that scam should only work on a
particular customer for... two years, and then they would be wiser the second time around. But plenty of users stay
with Verizon and AT&T year after year, getting new free phone "upgrades" that lock them into extended contracts.
And besides, are so many phone buyers
really that dumb, that they would take a "free" phone while entering
into a two-year recurring billing contract, without thinking about how much that would commit them to paying in the long
run? This is why I think that explanation doesn't meet the criteria of making realistic assumptions about how
easy it is to fool the public.

Or if you think people really are that gullible, then the obvious question is why that tactic doesn't work for other
products sold just a few feet away at the same Best Buy. While cars and other big-ticket items are often advertised
for "No money down and just 24 monthly payments of $X", the vast majority of laptops and other expensive consumer goods
are simply advertised with their sale price, and if you want to pay for them in installments, you can work that out
at the time of purchase. If consumers are really dumb enough to be swindled into overpaying for their cell phones over
two years, why aren't laptops and other items advertised in terms of two-year monthly payment contracts?
This explanation makes inconsistent assumptions about how dumb we are.

And it can't be as simple as "Some people don't have the money to pay for the phone up front," because
most places you enter into a cell phone service contract, will also let you buy the phone outright
and set up an installment plan to pay it off (which of course is basically the same thing as paying it off over
your two-year contract). You have to get a credit check to get on an installment plan, but you have to get a credit
check to get on a cell service contract too. So that can't be the complete explanation either.

And then there's the twin mystery of why T-Mobile finds it profitable to do the opposite and avoid contracts entirely.
This, at least, has a
plausible explanation --
T-Mobile, with the smallest coverage area of the major cell providers, was looking for a way to differentiate
itself from competitors that didn't involve slashing prices in proportion to their smaller coverage.
So their phones don't work out in the boonies, but you know exactly what you're paying for when you buy the phone,
and when you buy the service plan.

But why does everyone else continue to sell phones on contracts? Why do we still fall for it? And why don't
the same tricks work for other expensive electronic goods?

The best explanation I've heard so far involves a combination of the following:

Cell phones, unlike cars and laptops, don't look like they should cost as much as they do. (Electronics engineers
know that of course it's harder and more expensive to fit fancy circuitry into a smaller space, but regular phone
buyers instinctively think smaller should be cheaper.) So people would instinctively balk at the sticker price of a smartphone,
even if it were payable in installments so they didn't have to have the cash up front. As a result, they pay instead
through a more expensive service contract, even though the total ends up being more than if they had just bought the phone
and paid in installments.

Cell phones, unlike cars and laptops, are only useful when tied to recurring purchases of another product, the cell phone
service plan. This presents an opportunity to confuse buyers who have no idea how much that service plan should actually
cost, so they don't realize how much the service plan fee has been inflated to cover the cost of the phone. A laptop,
by contrast, may only be useful when connected to the Internet, but there isn't a one-to-one pairing of laptops with Internet
service contracts because multiple laptops in the same household usually share the same WiFi bill. And all cars require
gas, but it would be hard to sell someone a cheap subsidized car and then require them to buy all of their gas from one
overpriced vendor for the next two years.

These explanations are at least internally consistent, so they could be true. Who knows if they actually are true.
Can you think of others?

The good news is that other cell phone companies are catching on: When I called the local AT&T store to ask if they
had any "free" phones that came with a two-year contract, the salesman immediately steered me towards purchasing
the phone and the plan separately, T-Mobile-style, saying it was cheaper. He said I could get
a Nokia 920 for free with a two-year contract to pay $40/month, or I could buy the phone outright and pay it off
in installments of $11/month, while meanwhile using the service plan for $25/month, for a lower combined price of $36/month.
The local Verizon store said I could get the latest Droid for free with a 2-year contract paying $75/month,
or I could pay the phone off in installments of $16/month while getting a discounted non-contract service plan for
$65/month. So Verizon in this case doesn't actually make it cheaper to buy the phone outright and pay it off
in installments, but at least it's a step in the right direction. (When I bought a phone from Verizon two years ago,
they didn't offer any discount on their monthly service plan even if you bought the device outright.
It has always been possible to buy cell phones at a full retail price, but of course it didn't make sense unless you would
get a corresponding discount on the service plan.)

So this is good news, but it makes the relevant question even more difficult: Why is it that cell phone companies previously found it
profitable only to sell phones on contracts, and now find it profitable to move slightly in the opposite direction?
With any luck, soon the question will be a historic one: "How come cell phone companies used to confuse us about
what we were really paying for our cell phones, and why did we put up with it?"

That's because no amount of creative pricing and sexy marketing (random musing: CZJ was way better than pink motorcycle lady with annoying voice) can hide the fact that T-Mobile has a 1990s network in 2014. Seriously, it's pathetic unless you live in a major city, and even then you'll have to deal with inferior indoor coverage as compared to carriers with 850mhz licenses.

Here in Upstate NY your options as soon as you leave the city limits range from EDGE to "roaming on AT&T" (if T-Mo allows it where y

The analogy that I've long used is that Verizon is the hottest girl at the prom, and worse, she knows it.

That's why competition is so important. It's not just that Verizon is the hottest girl at the prom, it's that there's only 4 girls at the prom, 2 of them really aren't interested in being there, and the other 2 aren't really that hot or nice but there's no one else there. Meanwhile, the chaperones are keeping out oodles of much more deserving, attractive girls who want to be at prom but are forbidden because of idiot authoritarian parent council leaders, who maintain the status quo because Verizon is flirting with them.

Honestly, people take these contracts because they're gambling they won't leave after 2 years. And if they renew their contract, they obviously were right.

It's not just the dumb 2-year contract scam. We're also being fleeced for voice contracts, on both our land-line and mobile, because the phone companies prefer to continue charging a 1970's service charge for something that modern networks deliver practically for free. T-Mobile doesn't need 850MHz spectrum. They need free VoIP over WiFi whenever you're indoors at work, home, or a friend's house.

Fortunately, there's a new kid on the block, Republic Wireless, who is doing contract-free ultra-cheap service. By offloading traffic to your own home wifi, RW can in theory make money $25/mo for Sprint 3G "unlimited" service. That's the plan I have, and I have the $10 plan for my kids. Verizon 4G LTE was great (my previous phone was a Verizon/Google Galaxy Nexus), but for the $60/month savings on just one phone, I'll live with Sprint. Also, they've got the Moto-X for $300, contract free, and it's hands down the best phone I've had. Time will tell if sane service providers have a chance in this country.

I'm obviously at in advantage because i live in SoCal, but when i switched to T-Mobile at the start of 2010 i thought their 3G network was pretty good. When my phone started malfunctioning in... mid 2011 i think? and couldn't hold a 3G connection anymore, i thought their Edge network was slow, but i made do. When i got my new phone in late 2013 i thought 4G was blazing fast. Fast enough that i don't even bother switching to wireless at home. (That choice is influenced by being on the $30/month unlimited data plan and the fact that our wireless router can be a bit wonky at times.)

I haven't found anywhere outside in OC or LA where i can't get signal, except for some spots near the top of the Runyon Canyon Park, which i can live with. When i was on 3G or Edge there were a couple buildings that i couldn't get signal inside of very well (unfortunately one of those buildings was my office =) but since switching to 4G that problem seems to have disappeared.

(Except for the lunch room at work. I can't get signal in the lunch room. No one, no matter what their carrier, can get signal in the lunch room. They must have built it out of lead or something.)

(random musing: I like pink motorcycle lady, and don't remember anything distinctive about her voice at all. I don't really think she's any better or worse than CZJ was.)

There are a few shitty T-Mobile spots: Howard Hughes Center by LAX is problematic, for instance. But over all, I've been extremely happy with t-mobile, especially now that 4G is rolled out and I don't switch to wireless many times for the same reason you've stated (hey, unlimited is unlimited). I would most likely just ditch TIme Warner if T-Mobile gave me an option to use my phone as a hotspot (and yes, I'd pay extra).

That's because no amount of creative pricing and sexy marketing (random musing: CZJ was way better than pink motorcycle lady with annoying voice) can hide the fact that T-Mobile has a 1990s network in 2014. Seriously, it's pathetic unless you live in a major city, and even then you'll have to deal with inferior indoor coverage as compared to carriers with 850mhz licenses.

Here in Upstate NY your options as soon as you leave the city limits range from EDGE to "roaming on AT&T" (if T-Mo allows it where you're at, they don't in all areas) to "no service at all". I experimented with T-Mobile back in 2007-2008 when I couldn't afford to pay Verizon's premium prices and had to deal with zero coverage for the last ten minutes of my thirty minute daily commute. They've not really improved all that much since then, at least if their coverage maps are any indication.

The analogy that I've long used is that Verizon is the hottest girl at the prom, and worse, she knows it.

You're behind the times. When the AT&T / T-Mo merger failed, AT&T gave T-mo a bunch of spectrum. The service is way better now than it has ever been. I have LTE/4G coverage all over the place, including many rural areas. It is very rare for me to have only Edge or no service. Not to mention the fact that you now get free data / texting in most international companies. Perhaps it's different in NY State, but I have been using their service on both the Eastern Seaboard and in California with no

Actually it's a T-Mobile created problem. Nothing stopped them from bidding in the 700mhz auction, except for the part where they blew all their money (billions in fact) on the earlier 1700/2100mhz AWS auction. Nobody forced T-Mobile to do that. A lot of industry watchers scratched their head at that move, wondering why T-Mobile was buying high frequency spectrum to build out a last generation UMTS network when LTE and the 700mhz auction were already on the horizon.

More to the point, there are whole swathes of the United States where they hold valid PCS licenses that they've never used. It's not a spectrum limitation in these markets, it's an unwillingness to invest the required monies to service them. T-Mobile will never match Verizon or AT&T's footprint. One they don't have the money, two they're on record saying they don't believe that sort of coverage is important to their customers. On that last point they may be right, there's certainly room in the market for a value oriented competitor to the big boys, but so long as they have grossly inferior coverage they'll never really be in a position to dethrone Verizon or AT&T.

Verizon and AT&T are often condemned for the behaviors of their wireline divisions, wherein they seemingly cherry pick the most profitable markets for FiOS and uVerse, leaving the rest to rot on last generation DSL service. The irony is that T-Mobile does the exact same thing with wireless but is rarely condemned out for such business decisions.

I bought my Nexus 4 for $199 last year. It's unlocked with no contract. Went to Taiwan last year and just had to buy a 1 week data SIM. Now my phone was the WIFI hotspot for my family, who all had carrier locked devices.

Indeed, the answer to his question is "because people are stupid." I have no contract, unlimited everything, and pay $40 per month. I'm not going to shill them, there are plenty of them so names aren't necessary. My daughter was paying three times that on AT&T and switched to the one I have (and an Android like mine) when her iPhone broke.

After 2 years on contract my plan does not go down by the rent price of the device. So I have no incentive to keep paying the high price without getting a new device. At least this is how it worked until very recently.

The reason for this IMO is the same reason why most people complain about living paycheck to paycheck: They use credit cards instead of savings to buy this year's Christmas presents. Then they end up spending most of their income on interest.

I keep having to say this over and over again, but I actually live rather comfortably on an under $10k per year income. I pay my own bills, but I have zero debt and a large cash surplus that continues to build (which was acquired entirely by saving my income.)

Did you even read what he said? He directly addresses exactly what you just said.

And it can't be as simple as "Some people don't have the money to pay for the phone up front," because most places you enter into a cell phone service contract, will also let you buy the phone outright and set up an installment plan to pay it off (which of course is basically the same thing as paying it off over your two-year contract). You have to get a credit check to get on an installment plan, but you have to get a credit check to get on a cell service contract too. So that can't be the complete explanation either.

All you need to do is look at T-Mobile which I believe gives you a credit of $10 a month for bringing your own phone. That is what it is worth because that is the only other options. Admittedly Verizon is making more money off of you than that but do you really think if they offered contract free service without a phone discount that they would lower their prices by more than the 10 bucks necessary to compete with T-Mobile? That is what it is worth to not use a subsidy, no matter how much profit they are

I don't think that is the reason at all. I have always used no-contract pre-paid phone service. I save money, with no strings attached. There are good choices for anyone who cares, but most people choose the dumb option. Why? Beats me. The problem is that most of the people signing up for these contracts, are also eligible to vote, leading directly to our $17 trillion national debt.

Straight Talk's MVNO plans were the first time anyone could get GSM service that was BYOD-friendly, and ST's SIMs disappeared in early 2012 or so for over a year. Also, you could only get their SIMs online so few people knew about them.

T-Mo was the first provider to offer plans without a subsidy penalty, but they're not an option for many people because their network is so small. Although their 200MB/month "promotional free data" plan is one of the smartest marketing ideas in history. 200MB/mo leads to very little load on their network, but allows people in rural areas to monitor the reality of T-Mobile's services. (e.g. I'll know thanks to my Chromebook once they start offering more than just EDGE service in my area.)

Sprint and Verizon aren't feasible for BYOD due to being CDMA2000-based. That's starting to change slowly (the Nexus 5 was groundbreaking in this regard) but still they have a stranglehold on device compatibility.

AT&T does give any reasonable BYOD discounts unless you're on a family plan with lots of lines. (Their BYOD discount combined with an applicable plan is more expensive than their individual plans)

So contract-subsidized phones are taking forever to go away thanks to the carrier monopoly and a bit due to culture. People are stupid, and seeing a $1 phone throws them into a frenzy even if you show them the math that shows that they're paying so much more for service that the phone will cost them $200-300 more over 2 years than a cheaper no-subsidy plan and buying a device outright.

Tracfone was doing this in 1997. I have had unlimited voice for $50/month since 2006 with MetroPCS. That covers unlimited data now that I have a smartphone instead of my old flip phone. If I wanted to get a new number, I could drop that to $40/month.

There have always been options outside of the regular ATT/Verizon crap.

People suck at math. They think they need the contract to subsidize their $300+ phone because they just HAVE to have a new one every 2 years. With the savings of from a $40/month plan instead of a $120/month plan. You could literally throw away a new iphone or top of the line android phone every six months an make out ahead on the deal. AND on top of that get unlimited service with no overage charges.

In 2004 I bought my last subsidised phone - a Sony Ericsson P900. And the only reason I did this was because there was a loophole in the Orange contracts that meant I could get it dirt cheap by getting it on an expensive tariff and then change to a cheap tariff after the first month (they closed this loophole shortly after). My next phone was an HTC Dream in 2009, bought used off eBay. On Three's PAYG tariff that worked out pretty cheap. When the HTC Dream died in 2012, I imported a Samsung Captivate Glide and just swapped my Three SIM into it.

So the option to buy a handset and put it on a tariff of your choice has been there for years, if you actually look. But almost no one *advertises* off-contract handsets, so a lot of people don't even realise that you can do this, so they get a standard subsidised handset on, what they seem to think, is a good deal because they pay a low low upfront price and then a fixed monthly fee which gives them way more inclusive minutes/texts/data than they are ever going to use. If they had actually investigated their options, a lot of people would've realised that it was cheaper for them to buy a handset and put a PAYG SIM in it, because they're never *really* going to use those 10,000 minutes per month that they would've got with the subsidised phone.

Then, after 1-2 years, the MNO writes to their customer to say they can get a "free" (or low price) upgrade if they renew their contract, and you'd be stupid to turn down "free", right? Again, people don't investigate their options - if they did they would often realise it would be better to stick with their existing phone and move it onto a cheaper tariff.

And of course, no one in the industry wants to change this - the MNOs are making lots of money through these overpriced contracts, the phone vendors love the fact that everyone chucks away their perfectly good phone every 2 years and gets a replacement, and the customers usually don't know any better.

I guess add to that that for some crazy reason, phones are seen as a status symbol and therefore everyone's always got to have a brand new phone. TBH, from my perspective, the more recent phones don't seem anywhere near as good as the older ones, so I am loath to "upgrade" my phone. The HTC Dream may have been slow, but the form factor was fantastic; the Samsung Captivate Glide that I replaced it with is verging on the "slightly too big" side and the keyboard isn't anywhere near as nice to use; If I had to upgrade now, I'd be hard pressed to find anything to replace it with - none of the current phones have hard keyboards at all and screen sizes seem to have become stupid - everyone seems to be competing to be the first to make a phone that's even less likely to fit in your pocket/hand than their competetor's. Yes, the internals of phones are getting way better, but the form factors are far worse.

I paid $129 for my phone cash up front from Metro PCS. My service plan was $45 til I added in wi-fi tethering to bring it to $55/month. (My husband uses it more than I do though.)

Like its spouse T-Mobile, I can't use MetroPCS outside of large cities, except for emergencies or text messages. But if I'm out in the boonies, then I'm traveling from point A to point B on the Interstate or doing primitive camping - and don't need to be using my cell phone anyway!

I don't do car leases because at the end of the lease, I don't get to keep the car.

At the end of a car lease, you can keep the car - if you want to. You just purchase it for it's agreed upon value. It's pretty much a win/win situation. You have a much lower payment over the length of the lease; and then you can buy and keep the car if you like it, or return it if you don't.

In essence - say you are interested in a $50K car. For a purchase, you make payments on a $50K loan. For a lease, you make payments on a $25K loan, and at then end you either buy the car for $25K, or return it.

In essence - say you are interested in a $50K car. For a purchase, you make payments on a $50K loan. For a lease, you make payments on a $25K loan, and at then end you either buy the car for $25K, or return it.

I strongly suspect if you did the math you'd probably realizing you're paying more like $80K for that $50K car.

There's no way the lending institutions actually set it up in such a way as to be a wash.

> For a purchase, you make payments on a $50K loan.> For a lease, you make payments on a $25K loan, and at then end you either buy the car for $25K, or return it.

Not so much. For a lease, there is often a leasing company that makes the payments on the loan, collects the payments from the driver, and has a 35%-40% gross profit. In other words, the driver is paying 35%-40% more by leasing.

Uhmm, are they? I never bought any smartphone on contract with operator. The last phone I bought like that was a standard dumb phone many years ago.

Of course there are offers like that, but saying that "smartphones are tied to contracts" is bullshit. You just buy a phone, put SIM in and you're ready to go. If you're doing it in different way, that's your problem.

Hence the summary should read "Why is the US so backwards?". To which the answer is: "because people pay more this way".

Two-year contracts become less and less popular In Germany. There are people, of course, who want a new phone every two years and are ready to basically lease the hardware, but the prepaid options are getting more and more lucrative with an added bonus of being able to cancel the service at will.

If you want you can buy a dumbphone for 20 euros, get a prepaid card for free (some vendors ev

Really? My last two phones were bought through eBay gray market from Europe (one is O2, one was Orange), unlocked, and all I had to do was put my T-Mobile SIM into them (plus set a few details for MMS and such in the config) and they work just fine. T-Mobile even told me some of the less obvious settings to make.

My current carry-around tablet (7" Galaxy Tab, vs. my larger Xoom) is locked to Verizon but bought off of Daily Steals, and Verizon would have happily turned on data service had I wanted to pay th

What are you talking about? Of fucking course we can do that here in the good 'ol U.S. of A.

What do you think happens with every Google Play Edition HTC One, or every Google Nexus?

The fact is that most people prefer to pay $25/mo burried in a contract over two years to pay for their new $600 cell phone, because this is America, the land of revolving credit and low, low monthly payments.

I've lost count of how many phones I've bought and just thrown my SIM in. The most difficult task I've had to ever do is walk into my provider and ask for a Micro-SIM card when I got a newer phone. The next time I get any hardware from them will be when I need a Nano-SIM.

That isn't to say that you can't use a plan to your advantage: I once got the entire family an "upgrade" for $25/mo on the package -- and got a whole pile of crappy Android 2.2 devices they were dumping -- but only because they lowered my service plan by $25/mo as incentive. [No doubt the sales associate got a perk for making the sale, and used their latitude in retention offers to lower my plan rate. Everyone won that day.] When the payment plan ended, my bill ultimately went down by $25 forever (or at least until they fuck all their customers again), and I had a pile of emergency phones I could just throw a SIM in when one of the kids invariably lost theirs.

Since I don't use their shitty "loan you $600, just sign up for two more years" upgrade plans, I'm always free to walk, and always free to negotiate the best rate for my plan or move to another carrier. So the next time they globally try to screw people, I can walk away without as much of a care, and put the next provider's SIM in my phone.

For that, I have to buy my phones outright -- like a responsible adult not living on the credit treadmill.

Then just buy a phone from Europe? Or straight from manufacturer? I can easily buy US-banded version of Neo Freerunner or GTA04. Probably won't be problematic to buy any US-compatible Android phone from eBay as well. AFAIK ZTE Open is even sold there straight from the manufacturer. So you're telling me that all those phones won't work in US? What's the problem then?

Really? I've got a Nexus 5 purchased off contract. I can take the device to Sprint, AT&T, T-Mobile, and presumably at least some of the smaller carriers and set up a non-contract account. In Sprint's case, I'd have to take the phone into the store to activate it. For the SIM-based networks, they can send me the SIM in the mail, and I can pop it in the phone. Even in the States, many carriers have bring-your-own-phone programs.

You CAN take it to Sprint or AT&T, but you'll pay the same monthly charge as someone who didn't bring their own device (ie paying a monthly subsidy for a phone you didn't receive), there are sometimes exceptions, but in general that's how it works.

You CAN take it to Sprint or AT&T, but you'll pay the same monthly charge as someone who didn't bring their own device...

With AT&T at least that is no longer true; you get a $15/mo. discount ($25/mo. for the 10-50 GB plans) for bringing your own device or buying it in installments via their AT&T Next program, compared to the price with a 2-year contract. Source [att.com]

The roaming fees are still there, but they are forced down by European Commission every year, so they are not that big any more. Also - as i have an unlocked phone I usually buy a local prepaid data SIM when i go abroad - 10â gives me usually 3-5GB data (depending on a country) which is enough for a week or two.

Based on comments above, looks like it is. I have yet to see any reason for why people in USA can't do that, other than their own laziness.

I'm pretty sure I've seen some people from USA in Openmoko community, using their US-banded version of Neo Freerunner. Given that the only way to buy Freerunner was described by me in parent comment, as no carrier even sold those phones, I conclude that it must be possible. What's more - nowadays phones are quad- or five-banded, so you don't even need separate US and Eur

For some people, it's likely that a single payment per month that includes the phone and the service is a nice and convenient way to make the purchase, especially if they are likely to upgrade the phone every couple of years anyway. For others, the a-la-carte purchase of phone and service is more appealing.

Its like the story of the 2 bakers that had stores next door to each other, so were both not making much money.One put his prices up, the other put his prices down.Guess which one survived?

AT&T is the short-sighted baker who is still trying to charge you $10 for a loaf of bread and lock you into only doing business with them, because to do so makes them more money per customer.

T-Mobile has broken ranks with the price-fixing collusion of the big carriers, and are now trying to charge a fairer price and not lock people in, on the basis that Americans aren't actually stupid so will switch to a better deal. Honestly I'm not as sure as they apparently are about that one. T-mobile now make less money per customer, but are gambling on ending up with way more customers and it being a net win.I hope T-Mobile are proved righ and do win because companies like AT&T badly need to be given a black eye for their sleazy price gouging and nickel-and-diming practices.

Its like the story of the 2 bakers that had stores next door to each other, so were both not making much money.One put his prices up, the other put his prices down.Guess which one survived?

That depends on what kind of bakeries they are - if they're high end artisanal bakeries, odds are it's the baker who puts his prices up who will be the survivor. Because he can be seen as offering a better perceived value, while the guy who cuts his prices can be seen as offering 'cut-rate' goods or catering to a lower c

Verizon and AT&T are likely doing some kind of behind the scenes kickback to Sprint if Sprint is able to assimilate T-mobile. Meanwhile, resellers (like Ting.com) further expose the scam on consumers by the large telcos . Ting has you pay for your phone up front (or bring your own approved device), no contract, and only pay for what you use. If you use nothing, then your monthly bill will be $12 for one phone. $6 for every additional phone. 3 Samsung smart phones... regular medium use (500min,1000

Quite simple really. As long as they can trap you due to lack of alternatives, they will. Once there are *viable* alternatives, then they wont do it any longer.

That aside, i do see many non-contract smartphones out there.. but they do cost you upfront, which is beyond many people's budget in this current economy. So i really dont see the point of the question anyway.

Fleecing the customer is more dominant in the US because the US networks are shitty. Somebody said T-Mobile essentially has a 1990s network in the 2010s. Well, there are no 1990s networks outside of the US. Everything was built up later, after the tech was more mature. It's the same reason internet speeds are slower in the US than in Europe, and the same reason they still cost more regardless. The infrastructure is old, the pricing structure is old, and the customers have to pay for that somehow so they mig

First of all - the networks were not built after the technology was mature. We REPLACED the old network (NMT) with a newer network (GSM) which has been steadily evolving since then (3G, 4G). The 4G is basically a new network again, but as the phones are backwards compatible, the coverage is not such a big issue - if 4G stations cannot be reached, the phone uses 3G or older stations seamlessly.

Also - socialism or regulation is not the root cause. I think the root cause is that all our networks use the same standard and you have always been able to slap your SIM card into any phone you buy since 1995 or so. At the same time US phones were tied to a carrier - they did not work in another network - therefore you bought your phone from your carrier. In Europe you always bought your phone from an electronics shop and SIM from a carrier.

The main regulatory trick that further fueled competition was when you could switch networks without changing your number. After that the competition went insane and prices went clise to zero. I pay for "unlimited" data (they start to cap speeds at some point if you torrent with it which i don't know exactly as i haven't hit the trigger) and calls by the minute - which amounts to around 6-7euros a month ($8-9ish). Paying 40-60$ a month sounds like a pure insanity - my mobile bills were that high in the nineties.

But in this case, cell phone companies could arrange payment plans and keep the service separate. Say the phone costs $700. You pay nothing now and pay $30 a month for 2 years. On top of that, you pay for your month-to-month service. Now suppose in month 5 you decide you want to go with Other Cell Phone Company instead. You cancel your service, but will still pay your initial cell phone company $30 a month until your phone is paid off (or unless you pay off the amount remaining). As for the risk of the person just refusing to pay that bill, that's what collection agencies are for.

The real reason for contracts is to make sure that customers can only jump ship once every 2 years. This lowers "I've had a bad experience, I'm leaving" churn as the customers might have forgotten about it by the time their contract is up.

So this is good news, but it makes the relevant question even more difficult: Why is it that cell phone companies previously found it profitable only to sell phones on contracts, and now find it profitable to move slightly in the opposite direction? With any luck, soon the question will be a historic one: "How come cell phone companies used to confuse us about what we were really paying for our cell phones, and why did we put up with it?"

As TFA points out, it's generally a pricing perception issue. People will part with $0 upfront and pay $XX per month rather that $600 up front and $YY per month; even if the second option is cheaper. Since the first option results in more money companies do that

Why did T-Mobile decide to do it differently? The cell phone business is a high fixed cost (the network) low variable (carrying a call) cost industry. T-Mobile, as TFA points out is a much smaller #3. Even so, their fixed costs are probably not proportionately smaller since they still have a similar service footprint except perhaps in low density rural areas. So they need as many subscribers as possible to cover the fixed costs; hence a move to differentiate themselves in the market.

Secondly, people like to finance everything. You're just financing your phone. It just makes it a little more complicated that it's hidden in a monthly service. It's that simple. Doesn't need a story. Can we un-post this?

It's not just "handsets are expensive, so we're selling them on an installment plan" or "because we provide locked-in service." It's because the cell phone companies, and indeed almost every other business, does not want a revenue stream at slightly above the cost of providing their service. Cell service providers want the greatest possible monthly revenue stream, which will almost certainly result in a higher margin, to occur over the conract period and beyond. They figured most of us wouldn't trade in the

This article is pretty bad from this prespective. It raises certain questions and explores them, while ignoring all other possible questions.

Which is a very pretentious way of thinking.

A few of the comments here hit it head on (i.e. upfront costs too high, lock-in, etc.).

But a really large factor = in the 1990s there were tons of cell phone companies and it was an emerging market.

And these cell phone companies had major infrastructure expenditures because at the time coverage was mostly near major cities.

The typical WIN-WIN arrangement with customer and provider is the customer gets a low price (and all the greatness of a phone that works anywhere, unlike a landline) and the provider gets the security of having a stable cashflow to continue to improve their product and experience.

But Verizon and AT&T are monopoly utilities, thank goodness there is still T-Mobile as a 3rd option.

I am disappointed by this article, even in a few of the question are good, in that apparently the author of the article didn't think that any history of the cell phone industry was important to see the present in context of the past. History always sheds quite a bit of light on the present.

i wouldn't have bought my Note 3 if i had to pay $800 and a high monthly pricei call, text, read the news and some booksa cheapo phone to text and a kindle or wifi only ipad would be more than enough for me

cellular data is a luxury for most people and not really needed to go about their daily life

The title of the article is:"Really, Why Are Smartphones Still Tied To Contracts?"

However, this is really an American phenomenon - in most of the world the most common is to buy the phone you want "cash", then get a SIM card from the provider you want (or just move over your old SIM).

This also means that it's common to get a prepaid SIM if one goes abroad for more than a few days, in order to call/receive calls for cheap, and use data without being fleeced. It also means that the phones are not branded the same as the network, but branded as Samsung / HTC / Apple / etc.

Look you ask why other companies don't do this and the answer is simple, they can't get away with it. Every cable company on the planet would love to have invented the practice. I could even see this ad happening:

"Super Def TV"! Only Available on Xfinity! Get your Super Def TV today with 2 year cable contract.

Hell, they already do this with DVR's. Why don't people just buy a TIVO or TV with cable card slot instead of paying Comcast $15 a month for a DVR? Because they don't think that way.

The real answer is that companies have figured out that most people won't sit down and do the accounting to figure o

I knew going in that I'd be keeping it longer than the average user who must have the new thing every 18 months. Thus, it was cheaper in the long run than to be paying a carrier for the cost of financing.

I worked as a programmer for the sales & marketing arm of a cell company, 6 years ago. It was quite clearly stated (internally) that they wanted to get out of the subsidy business, but they couldn't. They were too small to take the risk of being the first or only to do so in their market. So long as other carriers were offering subsidies with their contracts, making the move would be suicidal. We probably weren't the only company in that situation, but unless you could come to some grand bargain, nobody

Smartphones are like most other consumer electronic goods which need some form of service contract to get the most out of.

- Satellite/Cable box - free, but you can pay more to get a PVR.- DSL/Cable Modem - free, but you can pay more to get a fancy WiFi router.- Smartphone - free, but you can pay more to get a better model.

Not sure what the difference is and why this key point was missed in the blog.

As a consumer in america ive always had the choice of locking into a 2 year contract and receiving my phone at a subsidized price, or paying full price. the first month is still prorated but i always choose to pay a little extra for the privilege of actually owning my device instead of the plan, which feels more like renting. your ultimate penalty for shunning a wireless carriers extreme savings deal on a bundle of contractual nonsense is add-on fees from hell and quite a bit more marketing than normal.

I'm trying to come up with an explanation that makes realistic and consistent assumptions about the stupidity of the buying public, and still makes sense

For years, companies (and even some government entities) basically kept saying "can't afford something, no problem, finance it". Which is fundamentally what caused the meltdown in '08 -- too much borrowing, and financial institutions giving out credit like candy to people who couldn't pay it back.

People have been conditioned to believe that their wants are in fact needs.

Can't afford that $700 smart phone? No problem, get it on credit. Can't afford the new sofa for your house? No interest no payments. Can't afford that new house? We'll give you a mortgage anyway.

When your buying public doesn't really understand credit, and when everybody "needs" to have the latest and greatest thing, the lure of convenient monthly payments (which you may still not be able to afford) solves your problem.

If the average America [nerdwallet.com] has $15K in credit card debt, you seriously have to ask why people buy their phones on an extended contract?

Seriously, you're trying to find the answer to a far broader issue than just cell phones.

When cell phones started to permeate the market, somehow they all ended up being subsidized by plans. I'm sure there are reasons why this happened (I have some ideas), but I'm not going to speculate.

It started to become apparent to some people that this was not actually a good deal for the customer, and some consumers and companies have negotiated a new mutually beneficial deal (e.g. T-mobile gets more customers, and it's customers get a cheaper more rational experience).

I've been in the telecom business but not the marketing end... I don't know about now but back then, the model was that phones were expected to last 18 months before the battery or something else gave out... So you wanted your customer to renew and tie in to a new 2 year contract when they were almost finished their current contract and prevent them from moving to another carrier.

This is based on a lot of assumptions. One is that being "locked into a contract" is a big deal. As an adult I need a phone to operate in the modern world, a cell phone and ideally a smart phone (particularly given my career). I know that I will need this service, I know that I will almost certainly need this service for the next two years. What is the harm in signing a contract. The chances that I will need to break it are extremely low. Ultimately the extra cost I pay pretty much works out to the discount I get on the phone (it might work against me a bit but its not like buying something on a payment plan is that odd or indefensible either) not everyone can drop 600 bucks on a new phone, maybe they would rather drop 300 and pay 300 over the next 2 years.

Admittedly the place were you get screwed is if you don't update your phone in 2 years but since plenty of people want the latest and greatest this really isn't an issue and if you don't want a new phone you can switch to a provider like t-mobile.

Now this does leave the question of why T-mobile is providing contract free wireless. I believe the reason is that they can't compete with AT&T or Verizon. They don't have a good service so they need another differentiator. Having lower prices is part of it but also offering contract free options to people who actually don't know if they will have a phone for the next two years or who want to buy a phone so cheep that getting a break on its price doesn't really make sense. Frankly though, that 10 bucks a month you save bringing your own device doesn't work out to be a huge savings in the long run if you are buying a new high end phone every 2 years anyway.

This idea that there is one true way to buy or sell services or products is asinine. Different things make sense for different people. Comcast wants to push its contract free offers in counter point to Verizon Fios but since I know I will be in my home for two years and I will need an internet connection that whole time is it really that big of a deal to sign a contract with verizon for those 2 years? People are convinced that contracts are always awful but for many people they really don't make any practical difference.

The author might want to walk into an ATT store these days. I was off-contract and wanted a new phone. Guess what, I bought my phone and I am still off contract meaning I can leave at any time because they didn't tie my phone purchase with my contract.

Rent-a-Center, Aaron's, Buddyrents, ColorTyme, Best Way, Rent-2-Own... there are dozens (if not hundreds) of companies that offer rent-to-own deals on virtually everything. They all have the same business model; relatively low payments that add up to ridiculously high prices for things.

The reason it works is simple; people love immediate gratification and will take very bad deals to get stuff now rather than being patient and saving up for it.

In the UK and elsewhere in Europe, I buy my phone outright then buy connectivity to a network separately. I currently pay £12 per month (including taxes) for 300 minutes, 500 SMSs and unlimited data. The unlimited data seems truly unlimited so far.

We don't pay to receive calls or SMSs, so the low looking amounts shown there are more than adequate for my needs.

I change providers roughly once every 6 months as deals change to ensure that I'm getting the best possible deal, and I take my existing number with me at no extra charge.

Sure, its hard to physically reclaim, but filling suit is not expensive to get you to pay for it, due to breach of contract. Normally they dont even have to show to court, just file the papers and garnish wages.

Ouch! I only pay 15 CHF (approximately 15 $) for 500 MB it Switzerland, and I think 1 GB would be ~20 CHF. There is no charge to keep the subscription (but then data is pay-as-you go, which is OK for a dumbphone or if you just don't use mobile data), calls inside the same network are for free, and calls to landlines abroad is cheap. Switzerland being outside EU, roaming in the EU is horribly expensive:/

It's also interesting that cellphones are so much more expensive in the USA than in Switzerland, given th

There's actually a good chunk of evidence on myopic behavior (there's a whole branch of economics dedicated to this stuff).

The comparisons in the parent aren't particularly apt. Buying a laptop or a car is a one-time thing. It's not the same as a cell phone service which takes the form of a business relationship over a *prolonged* period of time.

You pay for an internet connection for your laptop. And if you use your car, you probably have to pay for gas.
Should the laptop and the car be sold by the ISP/gas company?

Well, such deals where heavily advertized ~10 years ago, but I don't think they where very common. Typically the "cheap" subsidized price was written in big letters, and the unlocked prize which non-stupid people paid in small letters at the bottom of the poster. If you got the subsidized deal, you got a phone cheaper but paid more per phonecall etc. for the first 1-2 years, after which you could switch contract. There was also a law that the original operator was obliged to unlock your phone when this peri

I wish I had a mod point to spare you, my friend. Except someone taking offense at your language, you make a great point. (Ironically, Bennet is very much pro-f-word [wikipedia.org].)

Every couple of weeks, Bennet Haselton has an idea, and much like Hugo Chavez, he feels that he and we have a duty to get into a lengthy discussion about his ideas on the matter. And who is he? He's a guy that started some once controversial websites and promotes internet freedom. So do I, by the way, though I don't make it my full time job. Are his ideas brighter and more wise than mine or yours? I can't say they are when he calls T-Mobile profitable.

But, apparently, timothy thinks his ideas are so important that normal Slashdot story excerpt length needs to be set aside any time he has something to say. So why should it be "Troll" behavior to question why his ideas are heralded while the ideas of most others can only earn a dominance of Score:5 at most? I think that's very relevant discussion on this thread. I M H O.